Commodity prices moving up. Tighter supplies are good for some, bad for others
The era of gluts may be coming to an end. Economists and technical analysts see evidence today of higher prices for commodities and a return of inflation - a pattern distinctly different from the first seven years of this decade.Skip to next paragraph
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If the pattern holds, it could mean a big change of thinking for individuals, businesses, and governments which have grown used to the disinflationary economy of the Reagan era. It could be good news for some third-world countries - but disheartening for consumers and borrowers faced with higher prices.
Stuart Shinbein and many other people are watching the Commodity Research Bureau's futures index of 26 commodities today for telltale signs of a ``breakout,'' a big move up.
The index contains prices for everything from gold and barley to soybeans and pork bellies. If it crosses the 230 mark (see chart), then it is quite possible that commodity prices will continue to go higher, says Mr. Shinbein, that inflation is back, and that the era of gluts brought on by Reaganomics is over.
Shinbein is senior technical editor of the Commodity Research Bureau (CRB), a Jersey City, N.J., division of Knight-Ridder Inc. He has plotted chart lines that show that, since its top in November of 1980 at 337, the CRB index has been on a downtrend - except for a ``bear market rally'' that peaked in February of 1984.
A bottom, he thinks, was hit last summer when the index fell to 197 (it stood at 100 in 1967, the base year). Commodities were in bad shape, prices weak across the board, and excess capacity was high.
But since last summer, in fits and starts, commodity prices have been rising. If prices poke through 230, Shinbein feels, past technical patterns indicate prices will go on to rise for some time.
He concedes, however, that the index could always reverse course at some higher point, since past performance does not always determine the future.
Still, other key portents indicate the commodity rally could be genuine. Gold and silver prices are up strongly. Spot oil prices have risen above $19 a barrel. The dollar has sagged. Interest rates have been climbing. Recent consumer-price and producer-price data show higher rates of inflation.
Moreover, trade tensions and the weak dollar are causing more barriers to foreign products. That means higher prices for the imports that Americans have come to depend on - and higher prices charged by American competitors of these foreigners.
Overall, rising inflation is the consensus of economists polled by Blue Chip Economic Indicators, a newsletter based in Sedona, Ariz.
Many economists, however, think that the surge in precious metals, oil, and some other commodities will soon begin to level off and that on balance the inflation rate will remain moderate. And few economists are predicting a return to the double-digit inflation of the 1970s.
Thomas Runiewicz, an agricultural economist based in Washington, D.C., for Data Resources Inc., confirms that the ``trend is upward'' for agriculture commodities.
For wheat and corn, there has been greater demand strength in the US and major purchases by the Soviet Union and China. Recent spring planting estimates are down, he reports, and US farmland continues to go out of service either through government programs or because farmers see their enterprises as less viable.
The agricultural surpluses in Europe and North America persist, however, and even with cutbacks in plantings a bumper crop in the US could recur, Mr. Runiewicz says. So he doesn't expect major sustained price rises - just a firming.
If the world is indeed entering an era of higher prices, a change of thinking would be in order for investors, governments, and businesses.
For one thing, financial assets, which boomed in the 1980s until now, might not be as attractive as hard assets such as gold, real estate, oil, and so on. This could cause a downturn in the stock market.
For another, third-world debtor countries will find that they earn somewhat more for their exports and therefore are better able to make payments on their loans.
That, of course, varies from commodity to commodity. Oil exporters are doing better. Coffee producers are doing worse due to a reversal in prices recently. But in general it is the commodity producers who are in trouble financially and who could benefit from higher prices.
If inflation ever comes back in force, however, interest rates would rise and businesses would again have to contend with the disruption that inflation wreaks on business operations and that expensive borrowing wreaks on personal and corporate finance. Third-world nations, too, would find some difficulties, since higher interest rates could cause their loan service payments to climb.
It is only an uptick. But if Mr. Shinbein's charts keep going upwards, he and others will be more inflation-minded.